Impact of GST on Real Estate Sector

GST is one of the hot topics in the market today; most of them say it will benefit the end-user.

Before we look in to the impact of GST on real estate, let us know about the GST.

What is GST?

The GST is a Value added Tax (VAT) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods and services by the Indian Central and state governments.

The Goods and Services Tax (GST) is a single indirect tax which covers all goods and services. No doubt it’s a revolutionary tax-related reform to be seen in India in several decades, since it will eliminate the conflicting and cascading taxation structures which have confounded several industries over the past few decades. It will most certainly have a profound effect on India’s economic prospects.

GST: Impact on Real Estate

Though the goods and services tax (GST) tax structure has been announced, there is still a lot of assumption about which tax rate will be applicable to the real estate and construction industry. The expectations are for real estate to be in the 12% bracket. However, the GST rate is not the only important factor. The abatement rules as applicable under the service tax regime and the input tax credit facility for developers will determine if the effective tax incidence on real estate is lower or higher under GST. However, GST has no impact on Ready to move in apartments with Occupancy Certificate.

Indian real estate industry has seen a phenomenal growth in the recent past, not just limited to the metropolitan cities but also extended to the tier 2 & tier 3 cities across the country. These developments have raised a requirement of the regulatory body like Real Estate Regulation Act (RERA), which has already been implemented in some states and being implemented many other states across India. Now the GST is another major reform brought in the taxation policies which will have its significant impact on the real estate sector.

So far the construction industry has been taxable under VAT and service tax, with overlap of tax base and constant disputes on the rate of tax, given the multiple options available for discharge of taxes across States. This has resulted in diverse practices being followed by developers, across geographies and even within each State. These issues should be put to rest under the GST regime and the practices and positions should be common across India. Hence, the taxes paid by home buyers across States should more or less be the same.

Residential home buyers

At present, home buyers pay service tax and VAT on purchase of residential apartments or flats when booked at under construction stage. There are also various elements of non-creditable tax costs, like customs duty, excise duty, CST, entry tax, etc paid by the developer on his procurement side, which is inbuilt into the pricing of the units. All these tax costs add up to anywhere between 25%-30% of the price of the units. When the GST is implemented all these multiple taxes will be replaced with a single tax and also ensure smooth flow of credits through the chain. Hence, it is widely expected that GST should reduce the construction cost in the hands of the developer and thereby aid in reducing or at least maintaining the current level of prices in the real estate sector. Stamp duty is not proposed to be subsumed under GST and hence will continue as it is today.

Commercial property developers

GST should have a significant impact for commercial property developers, who today are burdened with high costs as no credit is available on construction services used for developing a commercial property which is then rented out. It is expected that under the GST regime, there should be a smooth flow of credit and current restriction on construction related credits not being available for offset is expected to be removed. This would help reduce the project costs in the hands of the developer, which should have a positive effect on rentals.

Looking at the points discussed the real estate sector is going to benefit in terms of free flow of credit which in turn increase the margin in the hands of developers. More importantly a greater transparency will come in the market. As the real estate market is driven by the market forces rather than the costing principles have to see whether the benefits will be passed on to the end-user or not?

One thought on “Impact of GST on Real Estate Sector”

I am staying in Bangalore post GST property price has increased by 5%, for my property it got raised by 2 Lakhs.

Note: Now we have to pay flat 12% GST on each EMI paid to builder. EMI includes landcost + construction cost.

In other ways builder are fooling by saying you have to pay 18% GST on 2/3rd of each EMI which is same as 12% flat as mentioned above.

Earlier we were paying ST&VAT only on construction cost only and not on landcost but now on both. This is horrible the state government has to look into it. This rule is brought by state government …… If current ruling government doesn’t act on time they for sure they will loose the battle !